Whether you long for bagging a bargain home and revamping a few parts here and there to meet your needs and improve the aesthetics, an FHA 203K home loan can potentially be what you’re looking for. Straightforwardly, this loan type can integrate the funding needed for home repairs and appliances into the actual permanent mortgage needed to purchase the home. That said, for those who deem it best to buy a beaten-up house and breathe new life into it, this home loan type is suitable.
This blog post will talk about what an applicant will have to present to be granted a 203K home loan.
How to qualify for a 203k home loan
- Depending on a borrower’s FHA-approved lending company of choice, their credit standing must range from 620 to 640. While a standard FHA home loan can accommodate borrowers with a credit score of at least 500, the 203k home loan may be more strict as funding here is costlier.
- A borrower’s loan amount must not reach the maximum limit of their area—and this includes both renovation expenses and the purchase cost.
- A borrower’s debt-to-income ratio must only be 41% to 45% at most.
- Borrowers must also intend to own and reside in the property they wish to purchase and renovate.
- Every FHA borrower is also required to pay an upfront mortgage insurance, no matter how large their down payment is and to what extent of home equity they’ve acquired. To a few, this can be a deal breaker, as this increases how much a borrower is obliged to pay on a monthly basis.
- For any borrower who makes a down payment that doesn’t reach 20% or has an LTV worth 78% or higher, annual mortgage insurance will be demanded from them.
- Note that an FHA loan covers any financial damage and losses to lending firms should a loanee default. Additionally, 203k borrowers are required to pay supplemental expenses such as 1.5% of the rehab costs or $350, whichever is greater; that among many other charges that involve extra appraisals and title policies and whatnot. Depending on how large these projects are, the costs may range from $500 to $800, probably even more.
FHA rehab loan vs. traditional FHA mortgage
The most significant difference between making the cut in a traditional FHA mortgage and an FHA 203K loan is that a borrower must qualify based on the expenses of the renovation on top of the purchase price. For instance, if a borrower wants to purchase or refinance a property pegged at $180,000 and fund $15,000 in repairs, they will have to qualify for a $195,000 mortgage and be able to afford a down payment of 3.5%.
To many, an FHA 203K home loan is the best choice when it comes to buying a house that calls for a lot of tender love and care. Not only does it make customization more manageable, but the money it will cost to pursue both endeavors (actually home purchase and repairs) is also easily streamlined into one loan. For more information about what a home improvement loan can do for you, click the link!